Russia walks thin line between Japan and China

Posted in Japan , Russia | 11-Jan-05 | Author: Sergei Blagov| Source: Asia Times

Russian President Vladimir Putin (R) listens to the Prime Minister Mikhail Fradkov in Moscow's Kremlin.
MOSCOW - The Kremlin's decision to approve the East Siberia-Pacific oil pipeline and pump its Siberian crude toward Japan has come as a blow to China's hopes of securing its own slice of Russia's hydrocarbon riches. And Moscow's energy overtures toward Beijing as a consolation prize are not much by which to set store.

On New Year's Eve, Russian Prime Minister Mikhail Fradkov approved the Taishet-Nakhodka oil pipeline blueprint, the government said in a statement. The annual capacity of the East Siberia-Pacific pipeline system would eventually reach 80 million tons, the statement said. The pipeline will go from Taishet, through Kazachinskoye, Tynda, Skovorodino, Khabarovsk to the Perevoznaya Bay terminal in the port of Nakhodka, crossing Russia's Irkutsk, Chita, Amur, Buryat and Primorie regions, according to Russia's state-owned pipeline monopoly Transneft, which has long backed the Taishet-Nakhodka project.

In March 2004, Russia opted out of the previous version of the project - an Angarsk-Nakhodka pipeline - in favor of the Taishet-Nakhodka blueprint. The Taishet-Nakhodka oil pipeline will be 4,130 kilometers long, some 250 kilometers longer than the Angarsk-Nakhodka line.

Russia's decision to build a Siberian oil pipeline to the Pacific port of Nakhodka will please Tokyo, but upset Beijing. Japan backed the Nakhodka route, while Beijing favored an alternative pipeline that would have brought the oil to Daqing in northwest China. Russia has been toying with both options, but in March 2004 indicated that it could favor the Japanese-backed project.

Tokyo has been lobbying for an oil pipeline route to the Pacific. To back up its lobbying, Japan reportedly promised up to $14 billion funding of the pipeline as well as $8 billion in investments in the Sakhalin-1 and Sakhalin-2 oil and gas projects, according to Russian media reports. The estimated cost of the oil pipeline from eastern Siberia to Nakhodka could reach $11-12 billion. The Taishet-Nakhodka route is seen as a strategic asset for Russia, allowing it to funnel crude not only to Japan but to Korea, Indonesia, Australia and the US west coast as well.

Russia had been discussing a China-bound oil pipeline for nearly a decade. In June 2002, Russian officials pledged to invest $2 billion to fund the construction of the 2,247 kilometer pipeline from the Russian city of Angarsk in the Irkutsk region to Daqing in northeastern China, which was scheduled to begin in 2003 and commissioned by 2005. Through 2005-2009, the pipeline was to supply 20 million tons of crude a year from oilfields in eastern Siberia. By 2010, the supply was to be raised to 30 million tons per annum. But finally, the Russian government opted out of the project.

In the past, Russian and Chinese officials have raised the possibility that a branch of Russia's Pacific pipeline could eventually be diverted to China. However, the December 31 announcement mentioned no China-bound branches of the proposed pipeline. As consolation, on December 30, Russia said it would offer China National Petroleum Corporation (CNPC) up to a 20% stake in a new state-owned entity that would control Yuganskneftegaz, the main asset of the collapsing Russian oil company Yukos.

Russia's state-owned Rosneft bought 100% of Baikal Finance Group, the company that won the December 19 auction to acquire a 76.79% controlling stake in Yuganskneftegaz. The Russian government indicated that Yuganskneftegaz assets would eventually be transferred from Rosneft to a new fully state-owned entity. An offer of a sizable stake in Yuganskneftegaz, a business that pumps about 1 million barrels of oil a day, could have sounded impressive. But Russia has refrained from offering CNPC a blocking, let alone controlling, stake in Yuganskneftegaz.

The Chinese state oil company is yet to comment on the proposed acquisition. However, Yukos has reiterated its readiness to go ahead with its legal action. "Whoever would eventually become a formal owner of Yuganskneftegaz, Yukos would continue to use all legal means to seek damages caused by forceful confiscation of this asset," said a Yukos spokesman. Yukos earlier indicated that it would sue to recover more than $20 billion of damages from all participants of the Yuganskneftegaz auction. Hence a possible acquisition of a stake in Yuganskneftegaz could be a double-edged sword for the CNPC.

In December, Russian President Vladimir Putin insisted that the Yuganskneftegaz auction had been carried out in compliance with Russian law. Putin also indicated that CNPC could be involved in operations of some Yuganskneftegaz assets. Moscow has signed agreements with CNPC reflecting bilateral "strategic understandings" on the expansion of energy cooperation, deemed vital to long-term economic growth in both countries.

In yet another gesture toward Beijing, Russia has pledged to boost oil exports to China by rail. Russia's state-owned Russian Railways Co, or RZD, has promised to more than double rail crude oil exports to 130,200 barrels/day (b/d)(6.46 million tons) in 2004, up from 60,000 b/d (3 million tons) in 2003. Russia's oil exports to China by rail are expected to further increase to 302,200 b/d (15 million tons) by 2006. The RZD has said it is technically feasible to boost rail shipments to China to 600,000 b/d (more than 30 million tons).

However, the planned oil exports to China could hardly serve as a substitute for the Angarsk-Daqing pipeline project. Rail freight is expensive, and while Yukos was keen to export oil to China by rail, other Russian oil firms are understood to be reluctant to replace Yukos as supplier to China due to high costs and low profit margins.

In the meantime, Russia's Siberian hydrocarbon riches are set to remain a field of competition between energy-thirsty East Asian economies. Russia's position is unique in terms of oil reserves. Moscow can offer massive acreage in eastern Siberia, while the country's oil reserves are still big enough to support booming oil exports for decades to come. Estimates of Russia's total proven reserves vary from 50 billion barrels to more than 100 billion barrels. Although in terms of reserves, Russia is still way behind Saudi Arabia's estimated 262 billion barrels, Russia has large untapped fields in Eastern Siberia and the Arctic shelf.

Russia envisages crude output growth up to 441 million barrels (60 million tons) in Eastern Siberia and up to 147 million barrels (20 million tons) at offshore oil fields around Far Eastern Sakhalin Island by 2020. Russia anticipates that development of untapped oil reserves in Eastern Siberia would require some $55 billion of investments in the next 25 years. The government claims that these projects could bring more than $100 billion in profits. According to the International Energy Agency estimates, Russia will need over $500 billion of investment in energy infrastructure by 2020.

Despite the high costs, investors could expect high profits. In 2003-2020, the Russian oil industry's combined profits could reach $820 billion, while the natural gas sector's profits are expected to amount to $350 billion, according to government estimates. Although it remains to be seen whether the anticipated oil price is enough to get the Eastern Siberian fields and transportation routes developed, these untapped reserves are set to remain a potentially important source of crude supply for Asian and Pacific economies in the years to come.

Sergei Blagov covers Russia and post-Soviet states, with special attention to Asia-related issues. He has contributed to Asia Times Online since 1996. Between 1983 and 1997, he was based in Southeast Asia. In 2001 and 2002, Nova Science Publishers, NY, published two of his books on Vietnamese history.